I am writing to follow up a couple of points raised by Mr Bacon on 3 December.
Mr Bacon asked a couple of questions about the status of the £250m of Qinetiq proceeds which MoD kept. He subsequently clarified them as:
- Where within the Treasury-MoD budgeting process was there a reference to the expected proceeds of the Qinetiq sale?
- What were these proceeds expected to be?
The NAO Report notes (at paragraph 1.7) an agreement between the Treasury and MoD that allowed MoD to retain up to £250m of proceeds from the sale of DERA. This agreement reflected advice from MoD's advisers that proceeds of £500m could be expected. The following extract from correspondence between the Chancellor and the Secretary of State for Defence in July 1998 makes this clear:
"On DERA, I had in mind when we spoke an arrangement which would allow you (MoD) to use up to £250m of the proceeds, depending on the amount raised. Since your advisers had estimated that the proceeds were likely to be over £500m, allowing you to keep 50% seemed fair. However, on the basis that you will do all that you can to maximise the receipt for the taxpayer, consistent with best value for money, I would be prepared to agree that you should receive 100% of the proceeds, up to a maximum of £250m".
At that stage in the process, no decision had been taken on how DERA would be split, or on how the sale process would be structured. The £500m would therefore have been an estimate of total proceeds from the whole privatisation process. As the NAO Report shows, the actual proceeds raised were £576m in cash plus the value of MoD's retained shareholding.
After the agreement of July 1988, the timetable for the DERA PPP changed. The Treasury agreed in the 2000 Spending Review to allow MoD a further £250m of capital provision. This was set out in the following extract from correspondence between the Chief Secretary to the Treasury and the Secretary of State for Defence in July 2000:
"We have agreed that a further £250m of capital provision will be added to 2001-02 from the Reserve, providing the DERA PPP is undertaken in that year, or we collectively agree that value for money considerations clearly suggest a delay until 2002-03".
As noted by the NAO, the Treasury agreed to credit the MoD's budget when the sale of the minority stake was delayed until 2003.
Mr Bacon also asked about the extent of penetration of qualified finance directors in central government. The present position is that 96% of departments have qualified finance directors, while 91% of total resource spending is in departments with qualified finance directors. Of the two departments (out of 46) without qualified finance directors, the finance director of the Crown Prosecution Service is in fast track training qualification; and MoD plans that its next finance director should be financially qualified, as the policy requires.
This is a significant improvement on February 2004, when only 39% of departments had qualified finance directors. And of course most department now have better strength in depth in their finance departments too. There is a variety of initiatives afoot, eg to attract qualified people, to equip civil servants at senior management grades with financial management skills, and to establish professional expertise among bright young recruits. The Treasury believes that these initiatives and others will help to improvement financial capability in departments.
Paula Diggle
Treasury Officer of Accounts
18 December 2007
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